In straitened times one of the first things landlords and occupiers tend to do is cut maintenance budgets. Andy Irvine, director and head of DTZ’s Birmingham project and building consultancy team, warns that this could be an unwise strategy.
The old maxim ‘a stitch in time saves nine’ couldn’t be more pertinent when approaching the subject of property maintenance. And despite difficult trading conditions for many businesses, putting off maintenance issues could be incredibly costly for many reasons.
Planned Preventative Maintenance (PPM) focuses on identifying potential problems and initiates preventative works before there is a consequential loss to the business. A prime example would be if a roof springs a leak over a computer room; the economic consequences to the business could be huge – knocking out essential services and disrupting the business for several hours or even days.
A major benefit of PPM is that it is possible to achieve valuable economies of scale. Several works packages can be factored in, such as erecting a scaffolding staging once to carry out painting and re-pointing at the same time rather than on two separate occasions. As preliminary costs such as supervision, access and site set-up typically account for around 15 per cent of total construction costs anything that can be done to reduce these on-costs is vital. It is also important to include within the PPM programme essential services including electricity, water, heating and cooling systems within the building to ensure the smooth running of the business.
If an occupier elects to defer maintenance the property will inevitably lapse into disrepair and as such often results in a breach of their lease covenants for repair and redecoration. This opens up the world of dilapidations.
Dilapidations will either be tackled via interim or terminal schedules. A landlord may serve interim schedules to maintain the asset class, particularly if there is a strategy to sell the building; an occupier in such circumstances should protect themselves by taking specialist advice.
Landlords can also serve a tenant with a “Jervis v Harris” notice, which allows them to enter a property, carry out repairs and recover their costs from the tenant. Inevitably this is resisted by the tenant, with resultant court involvement and someone has to pick up the costs. If the occupier has a PPM programme and carries out maintenance regularly this scenario is unlikely to occur.
Of interest to both tenants and landlords is if there is a break option in the lease. Often there are conditions that the tenant has to comply with if he wants to exercise that break, such as substantially complying with the repairing and decoration covenants. If they fail to satisfy those conditions there is a possibility that the landlord may try to frustrate the break, particularly in current market conditions, when it is preferable to retain income stream.
Tenants often forget that a lease is a contract and the landlord/tenant relationship is such that the tenant is obligated to carry out certain repair, decoration and reinstatement covenants as stated in that lease. When the lease comes to an end, the landlord may produce a substantial schedule of works that must be carried out and this may influence the tenant into having second thoughts about leaving. As a negotiating tool, the landlord may offer to defer, or even contribute to rectifying some of the defects if the tenant considers extending their lease or takes a new lease. If the tenant had carried out regular repairs and maintenance again some of these issues wouldn’t have arisen and the resulting commercial pressures avoided.
For landlords, it is vitally important to carry out a PPM programme to identify works that need to be carried out over a period of time so that he can maintain asset value and apportion service charge costs to tenants according to their lease agreements. The landlord has to factor in that he can only claim contributions from tenants while their lease is in existence.
From a purely financial point of view, it is also worth remembering that occupiers are often obliged to allocate reserves for dilapidations in their accounts under accounting rule IAS 37. These costs come straight off the bottom line, reduce profits and therefore tax liability.
Likewise, during merger and acquisition activity part of the due diligence process is to identify any dilapidation liabilities on properties involved in the deal. PPMs are vital in analysing these costs to ensure accurate forecasts can be made.
The current market may provide opportunities for property companies which are prepared to take a long term view and relieve occupiers of lease obligations, acquire the debt, invest capital to improve the asset and actively work it by raising rental growth to offset capital expenditure.
In general, landlords and occupiers are not as proactive in terms of implementing PPM programmes as they could be. It may be tempting to look at cutting costs at the moment, but as we have seen, this would be a false economy and could lead to even greater costs in the long run. Both landlords and occupiers should seek advice to ensure they are well-prepared to ensure that their property maintenance costs are actively managed to maximise the return on their assets.
